There are different types of yield curve. This is because one yield curve cannot show the expenses of money incurred by everyone.
There are four main types of yield curves the inverted yield curve, the normal yield curve, the flat or humped yield curve and the steep yield curve.
Normal Yield Curve
The normal yield curve is supposed to be a positive yield curve. In case of the normal yield curve the debt instruments that are being compared are equal with regard to quality of credit. However, the debt instruments that have a longer term period produce better yields than the debt instruments that have a shorter term period.
The normal yield curve is termed so because of the fact that in case of greater risks the market anticipates an equally great amount of compensation.
It is seen in case of the long-term debt instruments that they are facing more risks as a result of their long term periods. The main risks are those of alterations in the rates of interest and possibilities of default. The investor also cannot spend the money he has put in this debt instrument for any other purpose. The time value of the yield’s monetary component helps to cover the financial requirements of the investors.
Flat Yield Curve
As far as a flat yield curve is concerned the yields of the debt instruments with short term periods and the yield of debt instruments with long term periods are almost the same. The flat yield curve could be observed when there is a changeover between an inverted yield curve and a normal yield curve.
Inverted Yield Curve
In the instance of an inverted yield curve, the yield of a debt instrument having a long term period has a lesser amount of yield compared to a debt instrument that has a same credit quality but comes with a shorter term period.
Steep Yield Curve
The steep yield curve is a type of yield curve. The steep yield curve is normally observed at the following periods in an economy:
Post recession period
Prior to economic enlargement
Last Updated on : 1st July 2013